Donald Trump is the investment opportunity

Much has been written about the possible effect on the financial markets of the U.S. presidential election and many investors are keen to get an angle in order to protect their portfolios.

Suggestions such as adding to gold, S&P 500 put options and long Japanese yen and Swiss franc positions are sensible but predictable in advance of binary events that could have untoward effects on risk assets.

Markets are rightly worried. But the key question is whether investors should focus exclusively on hedging out risk using expensive instruments or dare to seek out opportunity.

Michael Nagle | Bloomberg | Getty Images

Donald Trump is seen speaking on a monitor as traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S.

Binary outcomes have plagued investment this year, most notably in the form of China and Brexit. Cutting exposure to risk assets might seem tempting ahead of a potentially market-moving event, but the danger is that a Clinton win could see a relief rally that leaves portfolios behind.

While it's true that a Trump sell-off is likely to be of a larger magnitude than a Clinton relief rally, a fundamental analysis of global economic growth and equity markets suggests that sell-off is unlikely to translate into a long-lasting impairment. This was certainly the case in January and June this year, when volatility spiked and investors panicked and then realized that the world was not about to end.

Ambitious and active investors may even choose to add to risk assets in the event of a Trump win. That sounds counterintuitive, but faith in the fundamentals, combined with a cheap entry point, has always been a great way for truly exciting gains to be made.

And such a strategy would have paid off well at least twice so far this year.

Of course, there will be those who declare that this time is different since America has never had to contend with a Donald Trump before. And it is probably the case that bond yields will over time rise more under the fiscal expansion Donald Trump proposes than under Hillary Clinton's tax vision. But for risk assets, consider this: Does a Trump victory really sound so much worse than a major China slowdown or Britain's exit from the European Union?

In the last decade, America's CEOs have had to deal with the global financial crisis, huge increases in regulation and political gridlock in Washington. And they were still able to send corporate profits to their highest proportion of gross domestic product for decades. History provides further context. The great economic flowering of the US took part in the late 19th century, a politically forgettable patch between the presidencies of Abraham Lincoln and Theodore Roosevelt. Donald Trump may be unappetising to some, but is he really going to be able to undo the economic and corporate fabric of America in the space of four years?

None of this is to diminish the high stakes at play in this election. For some investors, the thought of adding to risk in the aftermath of a Trump victory is simply too contrarian to stomach. For them, a portfolio built around solid foundations of repeatable carry and intrinsic return is a sensible and viable way to invest.

But for the more opportunistic investor, a Trump victory could provide a rare doorway to some solid economic and market fundamentals at compelling prices. Or to put it another way, just ask what it is that makes an investor cautious towards risk assets today. Is it a belief that the world is about to tip into recession and companies are becoming less profitable? Or is it the mere fact that markets are no longer cheap after seven years of largely unbroken progress?

Conventional thinking suggests that Hillary Clinton is the pro-market choice. But some investors may find themselves wishing for a Trump victory as the trigger for an overdue market shakeout. The real choice investors face ahead of this election is therefore between a low return, low volatility portfolio or one that is sufficiently imaginative to generate truly superior returns over time.

Julian Howard is head of multi-asset solutions at GAM.

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